Part 4: Systems and control issues

4.001
In the course of undertaking our inquiry, we identified some systems and control issues, some of which we believe contributed to the problem. These related to weaknesses in:

• the controls imposed by the Department’s system of financial delegations then in place; and
• the controls imposed by line management supervision of staff.

Financial Controls and Instruments of Delegation

4.002
We believe that the financial controls imposed by the system of financial delegations contained three distinct weaknesses. Before describing these weaknesses, however, it will be useful to explain briefly the legal position relating to the authority to incur expenditure.

Legal Authority to Incur Expenditure

4.003
Authority to spend money in government departments is derived in two ways, and both sets of requirements must be satisfied.

• Parliament must have passed either an Appropriation Act that provides for the expenditure or an Imprest Supply Act that provides a general authority for the expenditure in advance of an Appropriation Act.
• The expenditure must accord with Cabinet’s schedule of delegations, which sets limits on how much expenditure can be committed for particular purposes at different levels of delegation. The current schedule of delegations is contained in Cabinet Office Circular CO (99) 7, which took effect from 1 July 1999. The preceding schedule of delegations (relevant to these transactions) was contained in CO(96)11, issued on 11 October 1996.

4.004
The Public Finance Act 1989 and the State Sector Act 1988 both contain provisions relevant to the delegation by chief executives to departmental employees of the chief executive’s financial authorities.

4.005
Section 33(2) of the Public Finance Act 1989 provides that:

The Chief Executive of a department shall be responsible to the Responsible Minister for the financial management and financial performance of the department and shall comply with any lawful financial actions required by the Minister or the Responsible Minister.

4.006
Section 41(1) of the State Sector Act 1988 provides that:

The chief executive of a Department may from time to time, either generally or particularly, delegate to any other person (being a chief executive or a member of the senior executive service or an employee) any of the functions or powers of the chief executive under this Act or any other Act, including functions or powers delegated to the chief executive under this Act or any other Act.

System of Delegations

4.007
At the time, the Department had in place a system of delegated authorities for financial expenditure.⁴ The Instrument of Delegation identifies five levels, from chief executive (Level 1) to employees who are not budget managers but whose duties require them to commit Crown or departmental expenditure (Level 5). Departmental officers are authorised to approve expenditure in a single payment up to the limit shown for the relevant expenditure category, subject to an exclusion schedule for particular categories.

4.008
Apart from a qualification relating to capped programmes, the term “budget” means the annual budget approved for that expenditure type for that particular cost centre.

4.009
The Schedules to the Instrument of Delegation contain some definitions and specific rules. Among these are rules that:

2.1 Delegations will be generic to the specific level of the individual.

2.2 The person exercising a delegated function or power shall exercise it in accordance with:

• The relevant legislative or legal authority;
• Any policies of [the] Government relating to the State Sector relevant to its exercise; and
• Any obligation contained in the Department’s business plan, any policy issued by the Chief Executive or the person’s performance agreement relevant to the exercise.

2.3 The person exercising a delegated authority shall also have proper regard to any policies or standards of the Department relevant to its exercise, and shall obtain legal advice where appropriate before exercising it.

4.010
In terms of the Instrument of Delegation, expenditure on training falls into Category A1 - Operating Expenditure, Departmental Controllable. For this category of expenditure, a Level 3 delegate is authorised to approve expenditure up to the total of that person’s annual budget.

Weaknesses in the System

4.011
As it was constituted, and unless there was some contrary requirement, a delegate could authorise expenditure of a large sum – potentially the entire annual budget for that cost centre – on a single item. We consider this to have been a weakness, although it did not impact on these events. The weakness could be overcome by imposing limits on the amount that could be approved for one particular purpose.

4.012
In addition, the system did not require the delegate to either:

• undertake or commission a robust cost benefit analysis for significant items of expenditure, or
• have that analysis reviewed by staff with specialist skills in financial management.

4.013
We consider both of these omissions to have been weaknesses, and believe that they contributed to the problem. Any such analysis would have alerted both the General Manager, Human Resources and the Chief Executive at the time when their respective approvals were given.

4.014
Since these events, the Department has made changes to its delegations and financial controls which, if observed diligently, should significantly reduce or eliminate these weaknesses.

Line Management Control

4.015
As indicated in paragraph 1.006 on page 10, the evidence we were given from a number of staff suggested that there was confusion about who was directing and overseeing the work of the Course Organiser.

4.016
In normal circumstances, the Course Organiser reported to the General Manager, Human Resources. However, we heard different accounts about the reporting arrangements for the Course Organiser in relation to this course and other previous courses for workbrokers.

4.017
It was generally accepted in evidence that the Chief Executive briefed the Course Organiser directly about this course. The General Manager, Human Resources stated that the Chief Executive and the National Commissioner were closely involved in the workbrokers’ courses, and that direct communication between them and the Course Organiser had effectively been the norm since February 1999. This evidence was supported by the Course Organiser. However, the Chief Executive stated that she believed that the General Manager, Human Resources was continuing to oversee the work of the Course Organiser.

4.018
Line management reporting and accountability arrangements are important operational controls. Chief Executives and senior managers are at liberty to divert staff to special projects as the occasion arises. However, when staff are diverted in this way, it needs to be clear to whom they are reporting and about what.

4.019
On the other hand, in the absence of a specific written direction to the contrary, line managers should be able to assume that line management reporting arrangements continue to apply. All parties should therefore act accordingly.

4.020
In this specific situation, when a Level 1 manager (i.e. the Chief Executive) gives a direction to a Level 3 manager, he or she should ensure that the supervising Level 2 manager is informed of the details of the direction.

4.021
The decision of the Leadership Team to hold a course for service centre managers was taken at a meeting on 11 May 1999, at which both the Chief Executive and the General Manager, Human Resources were present. We have noted (paragraphs 2.007-2.009 on page 15) that there is disagreement over what specifically the Chief Executive asked the Course Organiser to do when they first met about the course on 12 May 1999. As previously indicated, the Chief Executive gave evidence that she had merely asked the Course Organiser to investigate the possibility of holding a course at Wairakei on the dates in question.

4.022
However, from the evidence that we heard, it did not appear that the Chief Executive took other steps to ensure that the Course Organiser’s line manager (the General Manager, Human Resources) was aware specifically of what she (the Chief Executive) had asked the Course Organiser to do. Had the Chief Executive done so, the General Manager, Human Resources would have had the benefit of that information when, on 14 May 1999, he was requested by the Course Organiser to approve the payment of the deposit for chartering the aircraft.

4 The Department told us that this system of delegations simply followed the system previously used in the Department of Social Welfare.